EDMUND A. SARGUS, JR., CHIEF UNITED STATES DISTRICT JUDGE.
This matter is before the Court on Defendants'
Additionally, Defendants filed a Motion to Dismiss, or in the Alternative, for Summary Judgment on Count II of the Goodman Complaint for Lack of Subject Matter Jurisdiction (Def. Mot. Dismiss Count II, ECF No. 110). Thereafter, Plaintiffs filed a Memorandum of Law in Opposition (Pl. Opp. Mot. Dismiss Count II, ECF No. 116), and Defendants filed a Reply Memorandum (Def. Reply Mot. to Dismiss Count II, ECF No. 120). Additionally, Plaintiffs filed a Motion for Partial Summary Judgment (Pl. Mot. Partial S.J., ECF No. 111), and Defendants filed a Memorandum in Opposition (Def. Mem. Opp. Partial S.J., ECF No. 117). Plaintiffs then filed a Reply Memorandum of Law (Pl. Reply Partial S.J., ECF No. 121), and these too are fully at issue.
Finally, Plaintiffs filed an Unopposed Motion to File Redacted Financial Documents and Partially Seal Filings (ECF No. 125); Defendants Filed a Motion to Seal (ECF No. 126); two nonparties filed Motions to Join Defendants' Motion to Seal (ECF Nos. 130, 131); and Plaintiffs filed a Motion for Leave to File a Response to Defendants' Notice of Supplemental Authority (ECF No. 133). Those motions too are ripe for review.
Plaintiffs in this consolidated action are five shareholders of seven mutual funds (the "Funds") managed by Defendants J.P. Morgan Investment Management Inc. ("JPMIM") and J.P. Morgan Funds Management, Inc. ("JPMFM") (collectively, "Defendants"). The Funds are registered investment companies under the Investment Company Act of 1940 ("ICA"), 15 U.S.C. § 80a-1, et seq. Plaintiffs brought suit under Section 36(b) of the ICA against Defendants for allegedly charging excessive advisory and/or administrative fees in violation of their fiduciary duty under the ICA. Section 36(b) of the ICA gives private litigants a one-year limitations period in which to bring suit. 15 U.S.C. § 80a-35(b). Damages are limited to fees received by investment advisers within the prior year. 15 U.S.C. § 80a-35(b)(3). Because Section 36(b) is "equitable" in nature, Plaintiffs are not entitled to a jury trial.
Plaintiffs Nancy Goodman and Jacqueline Peiffer (together, "Goodman Plaintiffs") bring this action against Defendants on behalf of and for the benefit of three bond funds: the JPMorgan Core Bond Fund (the "Core Bond Fund"), and the JPMorgan High Yield Fund (the "High Yield Fund"), and the JP Morgan Short Duration Bond Fund (collectively, the "Bond Funds" or the "Funds") pursuant to
Plaintiffs assert two types of claims against Defendants on behalf of each of the funds — a claim that Defendant JPMIM charged excessive advisory fees to each of the funds (Counts I, II, and III), and a claim that Defendant JPMFM charged excessive administrative fees to each of the funds (Counts IV, V, and VI).
Plaintiffs move to dismiss the claim on behalf of the JPMorgan Short Duration Bond Fund against JPMIM with regard to advisory fees (Count III), which is unopposed and hereby granted. (ECF No. 106.) Plaintiffs maintain their remaining claims on behalf of the JPMorgan Core Bond Fund and the JPMorgan High Yield Fund against JPMIM with regard to advisory fees (Counts I and II), and maintain all of their claims on behalf of all three funds against JPMFM with regard to administrative fees (Counts IV, V, and VI).
Plaintiffs Anne H. Bradley, Casey Leblanc, Jack Hornstein, Joseph Lipovich, Jacqueline Peiffer, Campbell Family Trust and Valderrama Family Trust (together, "Campbell Plaintiffs") bring this action against Defendants on behalf of and for the benefit of these four equity funds: (1) the JPMorgan Mid Cap Value Fund ("Mid Cap Value Fund"),
Plaintiffs assert two types of claims against the Defendants on behalf of each of the funds — a claim that Defendant JPMIM charged excessive advisory fees to each of the funds (Counts I, II, and III), and a claim that JPMFM charged excessive administrative fees to each of the funds (Counts IV, V, VI, and VIII).
The Defendants are JPMIM (or "Advisor") and JPMFM (or "Administrator"), Adviser and Administrator for the Funds.
The Funds are overseen by a Board of Trustees (the "Board"), which is responsible for, among other things, selecting and monitoring the Fund's service providers. The Board selected Defendants to serve as service providers for the Funds. Defendant JPMIM is the investment adviser to the Funds and receives an annual fee from each Fund for providing investment advisory services, including managing each Fund's portfolio of securities, researching potential investments and deciding which securities will be purchased for or sold from the portfolio of assets. Defendant JPMFM is the administrator to the Funds (and an affiliate of JPMIM) and receives
Each of the funds is an "open-end" management investment company, also known as a "mutual fund," registered under the ICA. The Funds do not have employees or facilities of their own. The Funds' operations are conducted by external service providers, such as Defendants, pursuant to contracts. In exchange for the investment advisory services provided by the Adviser to the Funds, the contracts, known as Investment Advisor Agreements ("IAAs"), require each of the Funds to pay the Adviser an annual fee that is calculated as a percentage of each of the Fund's assets under management or "AUM." The fees were approved by the Board, and were disclosed in each Fund's prospectus and other SEC filings. Collectively, the Funds had $105 billion in AUM at the close of their respective Fiscal Years 2015.
The counts against the Adviser and the Administrator in this consolidated case are as follows:
Fund Fund Claims Against the Claims Against the Type Adviser Administrator Core Bond Fund Bond Goodman Count I Goodman Count IV High Yield Fund Bond Goodman Count II Goodman Count V Short Duration Bond None Goodman Count VI Bond Fund Mid Cap Value Fund Equity Campbell Count I Campbell Count IV Large Cap Growth Equity Campbell Count II Campbell Count V Fund Value Advantage Fund Equity Campbell Count III Campbell Count VI Strategic Income Bond None None7 Opportunities Fund U.S. Equity Fund Equity None Campbell Count VIII
Summary judgment is appropriate "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The movant has the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that the nonmoving party lacks evidence to support an essential element of its case. As the Supreme Court has explained, "the plain language of Rule 56[] mandates entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Barnhart v. Pickrel, Schaeffer & Ebeling Co., 12 F.3d 1382, 1388-89 (6th Cir. 1993). To avoid summary judgment, the nonmovant "must
In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); see Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000) (stating that the court must draw all reasonable inferences in favor of the nonmoving party and must refrain from making credibility determinations or weighing evidence). The central issue for the Court to determine is whether "there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
Plaintiffs allege that Defendants breached their fiduciary duty to the Funds under Section 36(b) of the ICA, as amended. Section 36(b) of the statute provides that:
15 U.S.C. § 80a-35(b)(2).
The statute provides that the burden of proving a breach of fiduciary duty is on plaintiffs. In Jones v. Harris Assocs., L.P., 559 U.S. 335, 348, 130 S.Ct. 1418, 176 L.Ed.2d 265 (2010), the Supreme Court provided a road map for courts to follow in analyzing cases alleging violations of Section 36(b). The Court noted that Congress added the fiduciary standard of Section 36(b) to the ICA in 1970 "because it concluded that the shareholders should not have to rely solely on the fund's directors to assure reasonable adviser fees, notwithstanding the increased disinterestedness of the board." Jones, 559 U.S. at 348, 130 S.Ct. 1418 (quoting Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 108, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991)), The Court further noted that the fiduciary duty standard contained in Section 36(b) "represented a delicate compromise." Id. at 340, 130 S.Ct. 1418. The provision is "more favorable to shareholders than the previously available remedies" but "does not permit a compensation agreement to be reviewed in court for `reasonableness.'" Id. at 341, 130 S.Ct. 1418.
The Supreme Court explained that, prior to Jones, "the standard for an investment adviser's fiduciary duty has remained an open question in our Court, but until the Seventh Circuit's decision below, something of a consensus had developed regarding the standard set forth over 25 years ago in Gartenberg,"
"Finally, a court's evaluation of an investment adviser's fiduciary duty must take into account both procedure and substance." Jones, 559 U.S. at 351, 130 S.Ct. 1418.
Furthermore, the Supreme Court stated that "[i]t is also important to note that the standard for fiduciary breach under § 36(b) does not call for judicial second-guessing of informed board decisions." Jones, 559 U.S. at 352, 130 S.Ct. 1418. "Congress rejected a `reasonableness' requirement that was criticized as charging the courts with rate-setting responsibilities." Id. "Congress' approach recognizes that courts are not well suited to make such precise calculations." Id.
Under Jones, the Court must consider a host of factors when reviewing whether fees charged were so disproportionately large that Defendants violated Section 36(b) of the ICA, including those described in Gartenberg, while recognizing that a court is not to assess the fairness and reasonableness of advisers' fees. Plaintiffs assert that fees are shown excessive by the lower fees Defendants charge when they serve in the role as a subadviser or subadministrator to other funds. On the other hand, Defendants assert that (1) the fact that Defendants' fees are in line with their peer group funds, and (2) the fact that they have provided a better than average ultimate rate of return to the Funds after the fees are accounted, prohibits a finding that they breached their fiduciary duty under Section 36(b). Defendants contend that under Jones II these "two points `jointly suffice under the Supreme Court's standard' to warrant summary judgment in for of the defendant in a Section 36(b) case." (Def. Mot. S.J., ECF No. 113, p. 14.) It is true that, in Jones II, the Seventh Circuit stated that in the case before it, the funds' fees were in line with those charged by comparable funds and the funds' returns (net of fees) exceeded the norm for comparable investment vehicles, and that those factors "jointly suffice under the Supreme Court's standard." Jones II, 611 Fed.Appx. at 360-61.
However, this Court disagrees with Defendants' interpretation of Jones II, i.e., that undisputed evidence on these two factors alone requires summary judgment in favor of a defendant. Yet, to the extent that Jones II does hold as Defendants contend, it is of no moment. The Supreme Court's opinion in Jones, which is what governs this Court's decisions, clearly requires a trial court to review all of the relevant factors before making the determination as to whether a defendant violated Section 36(b). Accord, N. Valley GI
That being said, the Court notes that these two factors are telling regarding whether the fees are excessive. The Thomson Reuters Lipper ("Lipper") reports, one of the most commonly used sources to measure fees and performance in the mutual fund industry, show that overall the Funds performed better than, and the fees were in line with, other mutual funds of similar scope. (See Paragraph B.3, infra; Shlissel Decl. Ex. 4, Appendix C1 (Lipper Expense Data) and Appendix C2 (Lipper Performance Data). Plaintiffs do not and cannot deny this.
Additionally, the Funds, through fee waivers, gave back millions of dollars of fees that they were entitled to receive pursuant to their contracts. Plaintiffs do not contend that fees were not remitted; rather, they contend that even though the Funds were not required to return any of the fees, the amounts remitted were not enough. Moreover, the fees and the performance of the Funds, and the amounts of fee waivers were all part of the information considered by the Board in its review and approval of the contracts, discussed at length below. And, as mentioned at note 10 supra, per SEC regulation, this information is part of the factors that must be discussed by the Board as part of its process for selecting an investment advisor, and approving the advisory fee and any other amounts to be paid by the Fund under the contract. The Court examines all of this information in more detail below in its evaluation of the relevant factors indicative of whether Defendants violated Section 36(b) of the ICA.
Plaintiffs contend that Jones repeatedly instructed courts to "use[] the range of fees that might result from arm's-length bargaining as the benchmark for reviewing challenged fees." (Pl. Mem. Opp., ECF No. 118, p. 2) (quoting Jones, 559 U.S. at 347, 130 S.Ct. 1418). Plaintiffs continue, that Jones II explained that "the goal" of utilizing this range of fees that may have resulted from arm's-length bargaining "is to identify the outer bounds of arm's-length bargaining...." Id. (quoting Jones II, 611 Fed.Appx. at 360). Plaintiffs maintain and that the contracts for the Subadvised Funds provide "ample evidence" of those "bounds." (Pl. Mem. Opp., ECF No. 118, p. 2.) Plaintiffs further assert that
(Pl. Mem. Opp., ECF No. 118, pp. 17-18.)
Plaintiffs contend that the services provided to the Funds and the services provided to the subadvised entities are "substantially" the same. Plaintiffs move for partial summary judgment against JPMIM, seeking to have the Court rule that "comparisons between the investment advisory fees that JPMIM charges the Funds and the investment advisory fees that JPMIM charges other, independent mutual funds are apt comparisons under the Supreme Court's decision" in Jones, "and will be given the weight they merit by the Court at trial when determining whether the investment advisory fees
The Court next reviews the comparative fee structures between the proposed comparators. In this regard, Jones instructs:
Jones, 559 U.S. at 350, 130 S.Ct. 1418. Additionally, in a footnote the Court explained that comparisons with fees charged to institutional clients "will not `doo[m] [a]ny [f]und to [t]rial.'" The Court explained:
Jones, 559 U.S. at 355, n. 8, 130 S.Ct. 1418.
In this instance, even assuming arguendo that some of the services provided as adviser and as subadviser are "substantially" the same, Defendants have presented uncontroverted evidence that the risk undertaken and scale of services are different. Defendants' expert witness, Professor Stulz, explained that there are different risks in the different roles of adviser or subadviser:
(Stulz Decl., ECF No. 117-5, at pp. 2-3.)
Plaintiffs' expert witness, Professor Ayres, acknowledged that JPMIM assumed "a variety of different risks" in its two roles as adviser and subadviser, including risks identified by Professor Stulz.
(Stulz Decl., Ex. 1, Stulz Report, p. 21, ¶ 71.)
Additionally, Joseph Bertini, the former Chief Compliance Officer of the JPMorgan funds, testified at deposition that the Adviser provides more compliance services:
(Id., citing David Decl., ECF No. 117-4, Ex. 22 (Bertini Tr.) at 130:21-131:19.)
Defendants also provided testimony concerning differences in shareholder services provided by JPMIM depending on whether JPMIM's function was as adviser or subadviser. For example, Maria Connolly, the client portfolio manager for the Mid Cap Value Fund, explained the difference in client services:
(David Decl., Ex.21 (Connolly Tr.) 48:3-49:9; 63:20-24; 74:10-75:9.)
Defendants further assert that a proper comparison of fees is not between what the Adviser charges the Funds versus what the Adviser charges other funds when it acts as a subadviser, because, in those instances, the subadviser's fee is just a part of the fee charged by that fund's adviser. As an example, Defendants cite Plaintiffs' Appendix 3, which lists the subadvisory fee for the Columbia VP — Partners Core Bond Fund as 0.12%. "That rate is the subadvisory fee the fund's Sponsoring Adviser paid JPMIM, not the 0.44% advisory fee that the fund paid its Sponsoring Adviser in the fiscal year ending 2015." (Def. Mem. Opp. Partial S.J., ECF No. 117, p. 5, n. 12.) Thus, Defendants assert that "Plaintiffs have not presented any evidence about `the investment advisory fees that JPMIM charges other, independent mutual funds,' but only evidence of what JPMIM charges the Sponsoring Advisers, which are not mutual funds but instead are institutional clients." (Id. at p. 5.) To illustrate their position that these fees are not comparable, Defendants provide charts showing the subadvisory fees paid to JPMIM by Sponsoring Advisers, in comparison to the fee the Sponsoring Adviser receives from its fund. See ECF No. 113-1, Appendix E. For example, when serving as a subadviser for the Pacific Select Fund Value Advantage Portfolio, JPMIM receives 0.36% on all AUM, whereas the fund Advisor receives 0.66%. Id. Consequently, Defendants conclude that Advisers are paid higher fees than subadvisers, because their roles are not the same.
Giving the above comparisons the weight they merit as Jones requires, the Court concludes that Plaintiffs have not "show[n] that the fees [charged by JPMIM] are beyond the range of arm's-length bargaining." Jones, 559 U.S. at 350, & n.8, 130 S.Ct. 1418, citing 15 U.S.C. § 80a-35(b)(1). The Court considers, by way of analogy, what is required to establish comparability in employment discrimination cases brought under Title VII of the Civil Rights Act of 1964, 42 U.S.C. § 2000e. The Sixth Circuit has held that, in the employment context, to demonstrate that something is comparable, it must be comparable in all relevant respects.
Defendants also assert that "the undisputed facts show that Plaintiffs do not have any evidence to support either of their two premises for asserting that the Funds' administration fees were somehow excessive — a comparison to the fees charged by other administrators and the contention that the Administrator's services duplicated services from other providers." (Def. Mot. S.J., ECF No. 113, p. 19.) In their Complaints, Plaintiffs allege that three entities, JP Morgan Chase Bank, N.A. (an affiliate of the Adviser and Administrator), State Street Bank & Trust Co., and U.S. Bancorp Fund Services, LLC (collectively, "comparison entities") provided administration services to mutual funds for lower fees than the Funds paid. Defendants posit that the comparisons are not apt, because "undisputed evidence shows that the Administrator provided services different from the services specified in those contracts." (Def. Mot. S.J., ECF No. 113, p. 21.) Defendants provide evidence that the Administrator provided "a number of services to the Funds that the Comparison Entities do not provide in their contracts," including, among other things:
(Def. Mot. S.J., ECF No. 113, p. 19, citing ECF No. 113-2, Shlissel Decl. ¶ 7.)
Plaintiffs provide evidence that they maintain shows that the Comparison Entities offer similar services. (Pl. Mem. in Opp., ECF No. 118 p. 27, n. 64-66) (citing Boyle Aff. and Exs.). Plaintiffs also assert that the Administrator charged the Funds a disproportionately large fee "because the services of the Administrator provided `overlap[ped]' with services provided by other service providers to the Funds, so that the Funds paid `duplicative fees.'" (Goodman Compl. ¶ 151; Campbell Compl. ¶ 153.) The allegation of "overlapping" services is addressed by Brian Shlissel, Head of U.S. Funds Platform Management and President of JP Morgan Funds in his declaration:
(Shlissel Decl., ¶ 13.)
Defendants assert that Plaintiffs have no admissible evidence that any of the Comparison Entities provided any of these additional services. (Def. Mot. S.J., ECF No. 113, p. 22, citing Shlissel Decl., ¶¶ 7-13. On the other hand, Plaintiffs assert that they proffered evidence, including the report and testimony of their expert, Francis Vitagliano. (PI.'s Mem. Opp., ECF No. 118, at pp. 26-27, and n. 64-67.) Mr. Vitagliano opined in his report that "[o]ther unaffiliated mutual fund administration companies, such as State Street Bank & Trust Company ("State Street") and U.S. Bancorp Fund Services ("U.S. Bank"), also offer administration services at fee rates substantially below those charged by Defendants to the At-Issue Funds." (Boyle Ex. 14, ECF No. 119), Vitagliano Report, at p. 9. He further opined that the administration services provided by subadministrator JPMCB were the "same or substantially the same" as the services to the Funds. Id.
Mr. Vitagliano testified at deposition about the similarities of administrative services provided to the Funds and the subadvised funds, and acknowledged that there are some differences:
(Boyle Ex. 33, Vitagliano Tr., 80-81, 183-185.)
Assuming arguendo that the evidence presented by Plaintiffs is admissible, which Defendants dispute, the Court has given it the weight it merits in light of the similarities and differences between the services and the clients in question. The differences in the comparison evidence are material and, even when viewing the evidence in the light most favorable to Plaintiffs, the evidence is insufficient to raise any issue of material fact as to this Gartenberg factor.
Plaintiffs posit that "[m]utual fund investment advisers, such as JPMIM, realize economies of scale because the work or cost required to provide investment advisory services to a mutual fund does not increase proportionately as the amount of assets invested in the funds increases." (Pl. Mem. Opp., ECF No. 118, p. 21.) However, they assert that "[t]here has been no reduction in the gross advisory fee charged to the fund shareholders because none of JPMIM's investment advisory fee schedules for the Funds include breakpoints, and the net advisory fees have changed little."
(David Decl., ECF No. 82-33, Ex. 3 (Ayres Tr.) 190:6-20.) In considering the question of the role of economies of scale in its analysis of Gartenberg factors, the District Court in Jones I stated that, "whether breakpoints could have been set at a lower level is not the issue. The issue is whether the board could have agreed to the breakpoints being set at those levels after engaging in good faith negotiations. There is no indication that they could not...." Jones v. Harris Associates L.P. (`Jones I`), 2007 WL 627640, at *9 (N.D.Ill. 2007). Similarly, here there is simply no indication that the Board could not have agreed to the level of fee waivers after engaging in good faith negotiations.
Plaintiffs do not allege that the Funds performed poorly. Rather, they contend that the Funds were exceedingly profitable; too profitable for their fee contracts to be the product of arm's length negotiations. Plaintiffs assert that there is a "large disparity between the investment advisory fees charged and the costs incurred by JPMIM to provide those services. The result is extremely high profit margins exceeding 80% in some instances." (Pl. Mem. Opp., ECF No. 118, p. 3.) In support of their claim of excessive profits, Plaintiffs assert that Professor Ayres' expert report "analyzed the cost data included in these profitability reports and shows that JPMIM's costs are comparable, if not lower, for the Funds than the Subadvised Funds. In the few instances where JPMIM's costs (including distribution expenses) are greater for the Funds than the Subadvised Funds, the differences are too small to justify the difference in fees charged." (Pl. Mem. Opp., ECF No. 118, p. 16.)
Defendants respond that, "[f]or their services, the Adviser and Administrator each received a fee that was calculated monthly based upon a percentage of each Fund's net assets under management."
Id.
Defendants provide two charts depicting in detail the value of the fee waivers for each of the Funds at issue. Appendix A is a chart that compares the Funds' Gross Advisory Fees with the Actual Advisory Fees (After Waivers); Appendix B is a chart that compares the Funds' Gross Administration Fees with the Alleged Actual Advisory Fees (After Waivers).
Actual Advisory Fee
Fund Gross Advisory Fee (After Waivers)
Fiscal Year Ended 2/28/2015
Core Bond Fund 0.30%1 0.26%2
High Yield Fund until 11/1/16 0.65%3 0.62%4
High Yield Fund as of 11/1/165 0.60%6 -
Actual Advisory Fee
Fund Gross Advisory Fee (After Waivers)
Fiscal Year Ended 6/30/2015
Mid Cap Value Fund 0.65%7 0.60%8
Large Cap Growth Fund 0.50%9 0.48%10
Value Advantage Fund 0.65%11 0.61%12
1 As alleged in Goodman Compl. ¶ 62.
2 Calculated as gross advisory fee as alleged in Goodman Compl. ¶ 62 (0.30%) multiplied by
ratio of paid advisory fees ($67,153,000) to sum of paid advisory fees ($67,153,000) plus
waived advisory fees ($8,528,000). See David Decl. Ex. 1 (2015 Trust II SAI, at Part I-23).
3 As alleged in Goodman Compl. ¶ 64.
4 Calculated as gross advisory fee as alleged in Goodman Compl. ¶ 64 (0.65%) multiplied by
ratio of paid advisory fees ($64,126,000) to sum of paid advisory fees ($64,126,000) plus
waived advisory fees ($4,205,000). See David Decl. Ex. 1 (2015 Trust II SAI, at Part I-23).
5 Effective November 1, 2016, the High Yield Fund's gross advisory fee was reduced to 0.60%.
See David Decl. Ex. 7 (Schedule A, at 1).
6 David Decl. Ex. 7 (Schedule A, at 1).
7 As alleged in Campbell Compl. ¶ 68.
8 Calculated as gross advisory fee as alleged in Campbell Compl. ¶ 68 (0.65%) multiplied by
ratio of paid advisory fees ($95,897,000) to sum of paid advisory fees ($95,897,000) plus
waived advisory fees ($7,617,000). See David Decl. Ex. 2 (2015 Trust II SAI, at Part I-29).
9 As alleged in Campbell Compl. ¶ 68.
10 Calculated as gross advisory fee as alleged in Campbell Compl. ¶ 68 (0.50%) multiplied
by ratio of paid advisory fees ($76,364,000) to sum of paid advisory fees ($76,364,000)
plus waived advisory fees ($555,000). See David Decl. Ex. 2 (2015 Trust II SAI, at Part I-29).
11 As alleged in Campbell Compl. ¶ 68.
12 Calculated as gross advisory fee as alleged in Campbell Compl. ¶ 68 (0.65%) multiplied
by ratio of paid advisory fees ($58,747,000) to sum of paid advisory fees ($58,747,000)
plus waived $4,225,000). See David Decl. Ex. 2 (2015 Trust II SAI, at Part I-30).
Alleged Actual
Administration Fee
Fund Gross Administration (After Waivers)
Fee 13 Fiscal Year Ended
2/28/2015 14
Core Bond Fund 0.08% 0.056%
High Yield Fund 0.08% 0.048%
Short Duration Bond Fund 0.08% 0.044%
Alleged Actual
Administration Fee
Fund Gross Administration (After Waivers)
Fee 15 Fiscal Year Ended
6/30/2015 16
Mid Cap Value Fund 0.08% 0.055%
Large Cap Growth Fund 0.08% 0.082%
Value Advantage Fund 0.08% 0.063%
U.S. Equity Fund 0.08% 0.081%
13 Defined in Administration Agreement as 0.15% of the first $25 billion of average daily net
assets of all Category 1 and Category 4 funds in the JPMorgan Funds Complex (defined as all
Funds subject to the Administration Agreement) plus 0.075% of average daily net assets of all
Category 1 and Category 4 funds over $25 billion. Shlissel Decl. Ex. 1 (Administration
Agreement, Schedule B, at 12-13).
14 Goodman Compl. ¶ 119.
15 Defined in Administration Agreement as 0.15% of the first $25 billion of average daily net
assets of all Category 1 and Category 4 funds in the JPMorgan Funds Complex plus 0.075% of
average daily net assets of all Category 1 and Category 4 funds over $25 billion. Shlissel Decl.
Ex. 1 (Administration Agreement, Schedule B, at 12-13).
16 Campbell Compl. ¶ 121.
Defendants further assert that Lipper, one of the most commonly used sources to measure fees and performance in the mutual fund industry, and an independent provider of data unaffiliated with any fund sponsor, prepared reports that were provided to the Board in connection with its annual contract review process for the Funds. These reports compared each Fund's performance and "management fees" (which are the sum of the Fund's advisory and administration fees) to a universe of similar funds. Lipper uses rankings and quintiles to characterize the fees for each Fund relative to its comparative set, with the first quintile comprising the lowest fees, and the fifth quintile comprising the highest fees. (Def. Mot. S.J., ECF No. 113, p. 8, citing Shlissel Decl., Ex. 4.)
(Def. Mot. S.J., ECF No. 113, p. 9, citing Shlissel Decl. Ex. 4, Appendix C1 (Lipper Expense Data) and Appendix C2 (Lipper Performance Data).) Defendants assert that it is also undisputed that the Funds delivered strong performance.
(Id.)
Plaintiffs assert that "it is improper to assume that the fees charged to the funds in JPMIM's Lipper `peer groups' are negotiated at arm's length where Defendants have not even attempted to make such a showing." (Pl. Mem. Opp., ECF No. 118, p. 22.) They further assert that, "unlike in Jones II, Plaintiffs here contest that the so-called `comparable funds' are, in fact, comparable." (Id. at p. 23.) However, in the case at bar it is Plaintiffs' burden to show that the fees are so disproportionately large that they bear no reasonable relationship to the services rendered and could not have been the product of arm's-length bargaining. This burden does not belong to Defendant. Plaintiffs have provided no evidence to support their contention that the comparators used by the Lipper reports are not relevant. Both Defendants' and Plaintiffs' expert witnesses explained that Lipper reports are used in the industry and that they have used Lipper data.
(Def. Mot. S.J., ECF No. 113, p. 9, citing Shlissel Decl., Ex. 4, Appendix C1 (Lipper Expense Data), Appendix C2 (Lipper Performance Data).)
Defendants set forth a summary of the performance of the Funds in comparison to their Lipper universes taken from the Upper Expense and Performance Data in Appendix C1 and Appendix C2 cited above:
(Def. Mot. S.J., ECF No. 113, pp. 14-16.)
Defendants have presented undisputed evidence that, among mutual funds, the Funds' fees fall within the range of those comparators, and are not "disproportionately large." Additionally, Defendants have shown that the Funds' performance is generally favorable, and certainly within a "range of acceptable results." See Jones I, 2007 WL 627640, at *7.
The Supreme Court stated in Jones that "[i]t is also important to note that the standard for fiduciary breach under § 36(b) does not call for judicial second-guessing of informed board decisions." Jones, 559 U.S. at 352, 130 S.Ct. 1418. However, Plaintiffs contest the deference that should be given to the Board's approval of the IAA's for the Funds. (See Pl. Mem. Opp., ECF No. 118, p. 32-33.) Plaintiffs seek to discount the Board's decision making process, asserting that "[h]ere, the Court should give minimal, if any, deference to the Board's approval because Defendants failed to provide accurate and complete information to permit the Board to become fully informed about the advisory and administration fees charged to the Funds." (Pl. Mem. Opp., ECF No. 118, pp. 32-33.) Specifically, Plaintiffs assert that, "[p]rior to the filing of this lawsuit, Defendants did not provide the Board any analysis of the fees JPMIM charges or the services it provides as subadviser to independent mutual funds. Instead, JPMIM categorized `subadvisory relationships' as one of several types of `institutional accounts' (like a pension fund)." (Id. at p. 33.)
Defendants assert that "[t]he Trustees who served on the Board during the relevant period were both experienced and `independent' from the Adviser and Administrator, meaning they were not `interested persons' of the Advisor or the Funds under the ICA," and the Board "engaged in a robust approval process that is well documented." (Def. Mot. S.J., ECF No. 113, pp. 10-11.) The Board meets quarterly with independent auditors of the Funds, and each year the Board met several times to review information it had requested and received from the Adviser, the Administrator, and independent third parties. Id.
(Shlissel Decl., ¶¶ 15-16.) Furthermore, Defendants contend that, "[e]ach year, as a result of negotiations with the Board, the Adviser and Administrator agreed to waive millions of dollars in advisory fees and administration fees that the Funds otherwise would have owed under the applicable agreements." (Def. Mot. S.J., ECF No. 113, pp. 11-12.)
Ultimately, Plaintiffs have pointed to no irregularities or deficiencies in the Board's conduct, nor do they allege that the Board completely failed to consider the fees of subadvisory and subadministrative contracts. Rather, they assert that the form in which the Board received information about subadvisory and subadministrative services was provided as "one of several types of `institutional accounts' (like a pension fund)." (Pl. Mem. in Opp., ECF No. 118 at p. 33.) The Supreme Court explained in Jones that, where "the disinterested directors considered the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if a court might weigh the factors differently." Jones, 559 U.S. at 351, 130 S.Ct. 1418. Here, there is no evidence to support a finding that the Board failed to engage in a robust approval process for the Funds' IAAs.
To counter the effect of the evidence Defendants have provided, Plaintiffs "must demonstrate that the "flaws they find in what transpired would have made a legally significant difference," Jones I, 2007 WL 627640, at *9. However, the evidence Plaintiffs have adduced establishes at most that others paid different amounts for fewer services. It does not allow a reasonable inference that the amounts paid to the Funds were outside of the range that could be expected to result from arm's length bargaining. Section 36(b) does not create a duty that advisers and administrators receive the lowest possible fee amount as compensation for the services they provide. What matters is whether, in light of all of the pertinent factors as identified by the Supreme Court in Jones, there is such a disconnect between what the Funds were paid, and what the services were worth, that the fees could not have been the product of arm's length negotiations. Consequently, here the Board's approval is entitled to considerable weight.
Based on the foregoing, the Court concludes that Plaintiffs have not set forth issues of fact that, if resolved in their favor, could lead to a finding that Defendants had breached their § 36(b) duty. Accordingly, Defendants are entitled to summary judgment in their favor.
In its September 29, 2017 Order (ECF No. 109), the Court granted the parties' Joint Motion for Leave to File Dispositive Motions and Exhibits Under Temporary Seal (ECF No. 108), and ordered the parties to file, within fourteen (14) days of filing reply memoranda, a joint motion or separate motions for leave to permanently seal only the necessary Confidential information that was filed temporarily under seal pursuant to this Order, and thereafter to file redacted copies of the filings.
In accordance with the Court's Order (Goodman, ECF No. 109, and Campbell, ECF No. 78), Defendant JPMIM, on its own behalf and as successor-in-interest to Defendant JPMFM, moved (ECF No. 126) to permanently seal or redact selected documents listed on Appendix
JPMIM seeks to seal 47 documents and redact 28 others. All but 4 of the documents that JPMIM seeks to seal or redact were filed by Plaintiffs, who oppose the motion (ECF No. 128.) Defendants assert that this motion has become necessary in the course of this litigation:
(Reply Memorandum of Law in Further Support of Motion to Seal, ECF No. 129, at p. 1.)
Defendants further assert that the sealed or redacted documents represent a small number of the many documents associated with the dispositive motions, that those documents contain the nonpublic, confidential information of JPMIM (or its employees, affiliates, or experts), the J.P. Morgan Funds, or the J.P. Morgan Funds' service providers, and that public disclosure of this information would result in competitive harm, by disclosing information that a competitor could use to gain an unfair advantage, or another type of harm. JPMIM asserts that it has requested the narrowest possible seal necessary to prevent the substantial risk of harm from materializing. In proposing that certain materials be sealed or redacted, JPMIM asserts that it has been careful to ensure that the substance of the parties' arguments would be available to the public. The Court has thoroughly reviewed the documents in Appendix 1 and the supporting affidavits, and finds that the types of information that JPMIM seeks to protect fall into 7 categories: (1) confidential
"[T]rial courts have always been afforded the power to seal their records when interests of privacy outweigh the public's right to know." In re Knoxville News-Sentinel Co., 723 F.2d 470, 474 (6th Cir. 1983). The "`strong presumption in favor of openness'" can be overcome by a compelling reason for non-disclosure. Shane Grp. Inc. v. Blue Cross Blue Shield of Mich., 825 F.3d 299, 305 (6th Cir. 2016) (quoting Brown & Williamson Tobacco Corp. v. F.T.C., 710 F.2d 1165, 1179 (6th Cir. 1983)). As Plaintiffs note in their Response to Defendants' Motion to Seal, "[t]he proponent of sealing must ... `analyze in detail, document by document, the propriety of secrecy, providing reasons and legal citations.'" Shane Grp., 825 F.3d at 305-06 (citation omitted)). (Pl. Response Def. Mot. to Seal, ECF No. 128, at p. 3). This is exactly what Defendants have done. Plaintiffs do not object to the sealing of the information listed above as number 7, except for the hourly fee rate of Defendants' expert. The Court concurs that the fee rate of Defendants' expert is not the type of confidential information at issue here, and thus sealing that information is not required. The Court finds that Defendants have provided evidence of compelling reasons for non-disclosure of the specific information listed on Appendix 1, with the exception of the hourly fee rate of their expert witness. With that exception, the Court grants Defendants' Motion to Seal. (ECF No. 126.)
Plaintiffs also wish to seal permanently several confidential filings, and have filed an Unopposed Motion to File Redacted Financial Documents and Partially Seal Filings (ECF No. 125). Pursuant to the Court's Order of September 29, 2017, Plaintiffs move to permit the filing of redacted versions of eight documents containing Plaintiff Jacqueline Peiffer's monthly account statements relating to her J.P. Morgan Securities, LLC, securities brokerage account, and partially seal related documents. Specifically, Plaintiffs request that certain of Ms. Peiffer's financial information contained in records submitted under seal in unredacted form (Brown Decl., Ex. 2-5 and Boyle Decl., Ex. 4) be redacted to preclude public access to her personal financial information. Plaintiffs seek to redact the amounts of Ms. Peiffer's total dollar amounts invested in investments not at issue in the case at bar, and "her account number except for the last three digits (see Fed. R. Civ. P. 5.2(a)(4)) as an appropriate identifier between her two accounts." (Pl. Mot., ECF No. 125-1, at p. 3, citing Declaration of Michael J. Boyle, Jr. in Support of Plaintiffs' Memorandum of Law in Support of Their Unopposed Motion to File Redacted Financial Documents, dated December 20, 2017. (Boyle Decl., ECF No. 125-2, Exhibits 1-5)).
Courts have recognized the strong interest in keeping personal financial records from public view. SMA Portfolio Owner, LLC v. Corporex Realty & Investment, LLC, Civil Action No. 12-23-DLB-JGW, et al., 2014 WL 12650589 at *3 (W.D. Ky. Apr. 18, 2014) ("Indeed, it is undisputed that a person or entity possesses a `justifiable expectation' of privacy that their names and financial records not be revealed to the public.") citing In re Knoxville News-Sentinel Co., Inc., 723 F.2d 470, 477 (6th Cir. 1983). See also Wedgewood Ltd. Partnership I v. Township of
Plaintiffs have filed two motions for leave to file certain briefs.
Plaintiffs filed a Motion for Leave to File a Sur-Reply in Opposition to Defendants' Motion for Summary Judgment (ECF No. 124), to which Defendants have filed a Response in Opposition (ECF No. 127). The Court grants Plaintiffs' Motion for Leave to File a Sur-Reply and has reviewed the information proffered in the Sur-Reply.
Plaintiffs have filed a Motion for Leave to File Response (ECF No. 133) to Defendants' Notice of Supplemental Authority (ECF No. 132), to which Defendants neither consent nor object, but ask for the opportunity to submit a short response if the Court grants Plaintiffs' Motion. The Court grants Plaintiffs' Motion for Leave to File a Response and has reviewed the information provided in that Response. The Court finds no need to permit Defendants the opportunity to provide a response to Plaintiffs' Motion.
Based on the foregoing reasons, Plaintiffs' Unopposed Motion to Dismiss Goodman Claim III (ECF No. 106) is
17 C.F.R. Part 240.14a-101, Item 22 (c)(11)(i).
